South Dakota v. Wayfair - What Does it Mean?
If you are a small business owner, you've almost certainly heard about the recent Supreme Court ruling affecting sales tax collection and filing obligations for remote sellers. This ruling, which passed on June 21, 2018, paved the way for states to enforce "economic nexus" which means that sellers may be required to collect and remit sales tax in states even when they do not have a physical presence. The South Dakota v. Wayfair case overturned the 1992 case of Quill v. North Dakota, which long-held that sellers were only required to collect sales tax in states in which they had a substantial physical presence.
So as a small business owner, what does this mean for you? If you sell goods online or into another state do you have to run out and register for a sales tax license in all 50 states? Not so fast. While the Wayfair decision may broaden the scope of sales tax filing obligations for remote sellers, many small businesses may still fall under minimum thresholds that do not compel them to collect sales tax.
Below are answers to the most frequently asked questions from our small business clients.
Can you Summarize the South Dakota v. Wayfair Decision? What Does It Mean?
In short, the South Dakota v. Wayfair decision opens the opportunity for states to require remote sellers to collect and remit sales tax in states were they have economic nexus. Prior to the Wayfair decision, sales tax obligations were dictated by physical presence, which at its most basic level meant that sellers had to have a physical office, employees, or inventory within a state to be exposed to sales tax collection obligations.
With the Wayfair decision the rules for nexus have broadened. The courts determined that physical presence rules don't accurately address the reality of today's economy, and broadened the scope of nexus to capture sellers that have an economic tie to a state, not just a physical one. This means that sellers who meet certain thresholds for either sales volume or number of transactions into a state may be required to collect sales tax, even if they have no physical presence in a state.
While the Wayfair decision is specific to South Dakota, the ruling held that the Quill requirements of physical presence were "unsound and incorrect," essentially changing the rules of the game to allow any state to implement their own economic nexus provisions. In fact, many states had legislation pending that would go into effect on the heels of a favorable Wayfair decision.
Many sellers are concerned that this will present a huge risk, particularly small sellers that have low-volume sales, however there are minimum thresholds that give protection to small businesses. Specifically in South Dakota, the obligation for remote sellers to collect sales tax begins when they reach 100K in sales or 200 separate sales transactions in the previous 12 months. While these thresholds don't specifically apply to all states, most experts believe that other states will uphold these as the minimums.
Does This Ruling Apply to all States?
No... at least not yet.
The important thing is that the Wayfair ruling sets the precedent for any state to revise their statutes to implement economic nexus, and many states were prepared to implement new nexus standards as soon as the Wayfair decision was finalized.
At the time of this article, the states that have passed legislation are listed below and we anticipate that more will be coming soon. As state legislation is quickly evolving its always good to check with resources that are keeping dynamic lists as more information is made public.
See the updated list at Tax Jar, which also includes information about effective dates and links to additional guidance per state.
States with Economic Nexus Provisions:
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When Does the Legislation Go Into Effect? Do I Have to Start Collecting Sales Tax Now?
In South Dakota, the law was originally passed in 2016, however it was not deemed constitutional until June 21st, 2018. Most experts believe that South Dakota will not attempt to collect tax retroactively and will honor June 21st as the effective date. However, even with the recent court victory, South Dakota is still not able to enforce the law due to a State Circuit Court Injunction, which they anticipate will soon be lifted. To keep up to date on the status of the South Dakota enforcement, please visit the South Dakota Department of Revenue.
Other states are also in the process of determining active enforcement dates. A link to resources with the state-by-state dates can be found below.
Should We Expect States to Implement Low Minimum Thresholds? i.e. $1 in Sales?
Most experts believe that the Wayfair ruling will be upheld as the "standard" minimum threshold, and that most states will either match or have higher minimums than South Dakota. Based on the states that have already begun implementing economic nexus rules, this seems to hold true.
Do Economic Nexus Standards Replace Physical Presence Standards?
No, sellers must now consider both economic presence and physical presence.
Physical presence rules still apply. If you currently have a physical presence in a state you will continue to collect and remit sales tax as you have been. Similarly, if you expand your physical presence into a new state, you would also collect and remit sales tax if you meet the physical presence standards.
But now, instead of ONLY looking at physical presence, businesses will now also need to test for economic nexus in states where they do not have a physical presence.
How Do I Review My Business for Economic Nexus Risk?
A good way to begin is by pulling your sales data by state for the trailing 12 months. Summarize your sales data both in terms of total sales and number of sales transactions.
If you exceed the minimum thresholds in a state which has passed economic nexus laws, then you should consult with an advisor about analyzing your exposure and obligation to collect sales tax.
If you are close to the thresholds in a state which has not passed economic nexus laws, then your best bet is to continue monitoring those states for new laws to be passed as well as continue to monitor your sales activities in those states.
How Am I Possibly Going to Manage Tracking Sales Tax Rates In Each State?
If you have determined that you have economic nexus and need to start collecting sales tax in a new state there are many tools available to support you.
Companies like Avalara and Tax Jar provide automated sales tax solutions to help you charge, collect and remit sales tax accurately across multiple channels . Sales tax is also becoming more integrated with e-commerce sales platforms and accounting packages like Amazon, Shopify, Quickbooks Online and Xero. In many cases the software providers have already partnered with a sales tax solution and can automate your sales tax collection directly within the platform.
If you would like to understand more about the tools that can help you track sales tax across multiple channels, please get in touch with us for a complimentary assessment of your personal situation.
What Should I Do Next?
A good place to start is to review your business for exposure to economic nexus.
There are also a lot of great resources available online for you to review and monitor requirements as states continue to update their laws:
- The Sales Tax Institute is a sales tax training and education firm. They maintain an updated Remote Seller Nexus Chart.
- Sales Tax and More provides comprehensive summaries in a downloadable format. See the this link and navigate to the "Economic Nexus For Sales Tax" file.
- Tax Jar maintains an updated blog discussing the Wayfair decision and details about economic nexus by state.
As always, we offer complimentary consultations to all new clients. Please Contact us to have a conversation about your business's specific needs.
